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The outgoing i10 was Hyundai's first big hit with British buyers, and the challenge of this new-generation model is to appeal to those existing value-oriented customers while bringing enough gains in quality and refinement to compete with the class-leading VW Up.

Just two engines are on offer: a 1.0-litre three-cylinder petrol with 65bhp and a 1.2-litre four-cylinder petrol that produces 86bhp. Entry-level S trim is available with the 1.0 engine, while SE and Premium are offered with both engines.

You can also get the SE spec with a cleaner version of the three-cylinder engine that has stop-start to drop its CO2 emissions below 100g/km, or the combination of the four-cylinder engine and an automatic transmission.

Like all Hyundais, the new i10 comes with a five-year unlimited-mileage warranty, five years of roadside assistance cover and five years of annual vehicle heath checks.

What's the 2014 Hyundai i10 like to drive?

The 1.0-litre engine is essentially the one that features in the Kia Picanto, but it's been moved on a fair bit by Hyundai's engineers. They've done a good job of smoothing out the engine's vibrations, and cutting down the noise it produces. In fact, it’s more refined than any other three-cylinder in this class.

True, the 59bhp version of the Up gets up to speed a little quicker when you accelerate through the gears, but the i10’s engine is happier to pull from low revs, so you don’t have to change gear as often to keep up with the flow of traffic.

The 86bhp 1.2, meanwhile, has some welcome extra poke; it's with this engine that the i10 gets closest to Hyundai's claim that it can embarrass Fiesta-sized superminis as well as city cars. If you're prepared to use the free-revving motor beyond 3500rpm, you'll find it a willing companion, to the point where you can actually hurry things along in a way that's just not possible with the smaller motor.

That slightly more peaky nature does mean that the 1.2 is a bit noisier than the 1.0 when you get up to a fast cruise, although you'll only find it downright thrashy if you push it beyond 4500rpm. Despite this, it is our preferred engine option, despite the £500 price premium over the smaller engine in equivalent trim. The difference will be much smaller on PCP deals that are likely to make up a fair percentage of the i10's sales.

Regardless of engine, wind noise is well suppressed – at most speeds, you're more likely to complain of tyre rumble than anything else. The gearshift, meanwhile, is not quite as slick as the Up's, but it's sweet enough to allow you to keep either engine in the right rev range.

The previous i10's chassis was one of its strong points and this generation doesn't disappoint either. Its suspension is firm enough to keep body roll neatly in check, yet there’s also enough suppleness to cope with all but the sharpest urban potholes.

If there’s a disappointment it’s the steering, which is nowhere near as precise as the Up’s, but it is at least light enough to make parking easy.

What's the 2014 Hyundai i10 like inside?

You could argue that the biggest gains of all between the old generation of i10 and this model come in the cabin, where the previous car's incoherent, worthy-but-rugged look has been replaced by an altogether more polished environment.

That's not to say it's plush – there aren't any soft-touch materials to be found – but it is well laid out and finished in a range of nicely textured plastics which shouldn’t scratch too easily, and don't look cheap. The same can be said for the switches, many of which have been adopted from cars further up Hyundai's range.

There's also a coloured 'bar' that runs right across the centre of the dash (four colours are offered, depending on trim level), and it does a good job of breaking up the black plastic. Top-spec Ups feel a little classier, but the i10 is easily a match for models lower down the range.

The rest of the front cabin is equally impressive, with a decent cubbyhole ahead of the gearstick and big bottle holders in both doors. It's worth noting that SE and Premium models get controls for all four windows in the driver's door, which is more than you get in most city cars.

Where the i10 leaves all its rivals trailing is in the amount of passenger space it offers; this is a car that could keep four six-footers comfortable on a reasonably long journey.

However, the boot is only fractionally bigger than an Up’s, at 252 litres, and while the i10’s advantage increases when you lower the rear seats, there’s a fair old lip to lift your groceries over, and no height-adjustable boot floor available to negate that.

It's worth noting, too, that sat-nav isn't even an option, so you'll need to use either a rigged-up smartphone or invest in an aftermarket unit. In this area at least, the i10 does miss a trick compared with the good-value system that's offered as an option on the Up and its sister cars, the Seat Mii and Skoda Citigo.

The entry-level S-spec version of the 2014 i10 comes with six airbags, central locking, electric front windows and a CD player with USB connectivity. It costs from £8345, the same as the cheapest version of the outgoing model, although if you want air-conditioning, you'll need to opt for the 'S Air' edition, which is an extra £650.

The middle trim, SE, is likely to be the best seller. It’s available from £9295 and gets air-con as standard, as well as remote central locking, electric rear windows, electric heated door mirrors, body-coloured door handles and mirrors, and driver's seat height adjustment.

Unlike most Hyundais, the i10 can be specified with several option packs. These include a Connectivity Pack (Bluetooth with voice recognition, rear speakers and steering wheel-mounted controls), a Winter Pack (heated leather steering wheel and heated front seats) and Driver Assist Pack (rear parking sensors and cruise control with a speed limiter).

Should I buy one?

The new Hyundai i10 represents a major step forward over its predecessor – to the point where it's an extremely tempting alternative to a VW Up, and not just because it's cheaper.

The Up still sets the standard for driver enjoyment, thanks to its more precise controls, plus it’s plusher inside and better equipped if you go for the top-spec High Up model.

However, the i10 is more spacious and refined, and it feels significantly classier than the versions of the Seat Mii and Skoda Citigo that are available for similar money. If you’re looking for a practical car that will be very cheap to buy and run, there’s nothing better. It’s undoubtedly the best car Hyundai makes.